In search of the Goldilocks economy

Once upon a time, mainstream economists presumed we would forever live in a Goldilocks economy: not too equal and not too unequal but just right.

But, as we know, the Goldilocks economy no longer exists (and hasn’t, for over three decades), as economic inequality has continued to grow. And some economists are starting to get worried.

Like Joe Maguire, who wrote the recent report for S&P Capital IQ, “How Increasing Income Inequality Is Dampening U.S. Economic Growth, And Possible Ways To Change The Tide.” His view is that inequality, while “a necessary part of what keeps any market economic engine operating on all cylinders,” is now out of control and threatens to undermine economic growth.

Maquire discusses both the causes of growing inequality (such as the percentage of income captured by “supermanagers,” technological innovation, declining unionization, and the fact that government taxation does little to create a more equal distribution of income) and its consequences (lower productivity, financial fragility, secular stagnation, and a slowing of growth rates). And while he certainly holds out hope for a return to the “just right,” Goldilocks economy, mostly through increased education (and certainly not through any kind of serious redistributive measures), he understands that the dangers of not being there are very real:

some degree of rebalancing–along with spending in the areas of education, health care, and infrastructure, for example–could help bring under control an income gap that, at its current level, threatens the stability of an economy still struggling to recover. This could take the form of reallocating fiscal resources toward those with a greater propensity to spend, or toward badly needed public resources like roads, ports, and transit. Further, policies that foster job-rich recoveries may help make growth more sustainable, especially given that rising unemployment correlates with rising income concentration. Additionally, effective investments in health and education promote durable growth and equity, strengthening the labor force’s capacity to cope with new technologies.

The challenge now is to find a path toward more sustainable growth, an essential part of which, in our view, is pulling more Americans out of poverty and bolstering the purchasing power of the middle class. A rising tide lifts all boats…but a lifeboat carrying a few, surrounded by many treading water, risks capsizing.

And if they don’t find their way back to the Goldilocks economy? Well, remember, since she ate the porridge, broke the chair, and fell asleep in the bed, the bears managed to chase her out of the house and into the forest.